Interest rates cut but growth downgraded heaping pressure on Chancellor Rachel Reeves

The Bank’s Monetary Policy Committee also voted for a quarter-point reduction in interest rates after similar cuts in August and November last year, bringing the base rate to its lowest point since June 2023.

Governor Andrew Bailey said the cut will be “welcome news to many” but that the Bank is “monitoring the UK economy and global developments very closely, and taking a gradual and careful approach to reducing rates further”.

The base rate helps dictate how expensive it is to take out a mortgage or a loan, while it also influences the interest rates offered by banks on savings accounts.

Households on tracker mortgages will see their monthly payments decrease by £28.98, according to figures from banking and finance industry body UK Finance.

The Bank halved its growth forecast for the UK economy to 0.75 per cent for this year, down from previous estimates of 1.5 per cent, before accelerating again in 2026 and 2027.

The downgrade is a blow to Ms Reeves after Labour made growing the economy its key priority. She said: “This interest rate cut is welcome news, helping ease the cost-of-living pressures felt by families across the country and making it easier for businesses to borrow to grow.

“However, I am still not satisfied with the growth rate. Our promise in our plan for change is to go further and faster to kickstart economic growth to put more money in working people’s pockets.

“That’s why we are taking on the blockers to get Britain building again, ripping up unnecessary regulatory barriers and investing in our country to rebuild roads, rail and vital infrastructure.”

It also comes amid signs inflation is rising again, with forecasts pointing to a higher-than-expected peak of 3.7 per cent later in the summer.

The Bank said the increase to inflation, which measures the rate of price rises across the economy, is mainly down to higher-than-expected energy prices, as well as rising water bills and bus fares.

Inflation is set to only fall back to the Bank’s 2 per cent target in the final quarter of 2027, it said, about six months later than previously thought.

Despite the cut to near-term growth forecasts, the Bank said the economy would grow faster than expected in the longer term, with a growth rate of 1.5 per cent for 2026 and 2027, both up 0.25 percentage points compared with the last forecast.

Mr Bailey said he is a “strong supporter” of Ms Reeves’ growth plans, however they are likely to have an impact beyond the Bank’s three-year forecast.

“Growth rate in the UK has been low since the financial crisis – addressing those questions is critical, so I very strongly agree with the Chancellor,” he said.

“Structural policies take time to come through. As we are looking at a two to three-year horizon, you wouldn’t expect that to come through quickly.

“But that does not mean it doesn’t matter and won’t have a positive impact.”

The Joseph Rowntree Foundation urged the Chancellor to act quickly to help people struggling with the cost of living crisis.

“With costs set to stay higher for longer they are in desperate need of more pounds in their pockets, as the Chancellor has promised,” senior economist Rachelle Earwaker said.

"The Chancellor must recognise the peril ahead for families on low incomes, who can’t wait for the promised benefits of future economic growth, and make sure they’re protected.”